Apple is a 21st century innovation phenomenon. In the last ten years, Apple has risen in the Fortune 500 from #300 to #5 in 2013 (on current results). Indeed iPhone and iPad would sit in Top 30 and Top 100 respectively of US company revenues. Yet to use typical innovation measures (number of patents, per cent spend on Research and Development), Apple would not be a top performer.

New measures of innovation are needed to account for Apple's innovation success. Apple focusses on products which 'delight customers and inspire employees'. I call this a value focus, consistent with a value definition of innovation. Innovation can be defined as new or different things which create value for consumers.

Problem

Measuring innovation is tricky because measuring value is tricky, and innovation revolves around value creation. Value is, at least for consumers, slippery, dynamic, emotional, part-social and shifts with new information. I propose three measures for innovation, part tangible (the business side), and part intangible (the value side).

From an accounting and business perspective, I propose to measure innovation (and hence value creation) as gains in sales and profits, which indicate presence of new value. Either new consumers are buying or returning consumers are buying again. This measure can be gamed by purchasing a business to inflate sales and profits, or by slashing costs which may affect consumer service.

From a value and intangible perspective, I propose to measure innvation (and hence value creation) as shifts in consumer sentiment, such as satisfaction, attitude and loyalty. These shifts can trace shifts in consumer value before they are enacted as purchases, and reflected in revenue and buying behaviour.

Market value can be a proxy for combined sales, profit and consumer sentiment.

Solution

Following Svieby (1997) work on intangible indicators, relative rather than absolute indicators are useful to compare performance over time and across organisations. I suggest using a combination of absolute and relative measures.

To compare companies, rank the companies by net sales gain (Yr2 - Yr1) over the period examined (such as a year). Award the largest gainer 100 points and other companies a proportional score. Repeat the process for relative gain (Yr2 / Yr1). Repeat for profit. The most innovative company will score 400, showing growth in sales and profits both absolutely and relatively. Other companies will perform relatively less. Adjust for business acquisition over the period, removing those results which impact sales and profit.

For sentiment, ideally a five point scale is used. This scale reports consumer attitude as highly satisfied, satisfied, neutral, dissatisfied, highly dissatisfied. For a group of respondents (say 100), a maximum score is 500, minimum score is 100, so subtract 100, to give a 0 - 400 range. Consumers should be asked: how satisfied are you with (for instance, Apple) overall?

An overall measure combines financial (tangible) and sentiment (intangible, value oriented) measures. The appropriate balance depends on which measure seems most important. About 50:50 would seem too high on sentiment, and 80:20 would seem about the minimum weight to give sentiment.

Notes:

1.On these measures, Apple rates very highly on almost every measure, except one ahead of Google and Amazon.

2. Using relative and absolute measures gives small companies a chance to score highly (relatively fast growing) and large companies a chance to demonstrate their economic impact (absolutely).

3. Profit reflects value because business gains for value delivered can be invested in new value creating products and services.

A shorter version of this hack was submitted to the Department of Commerce Innovation Metrics programme in 2008 (including CEOs of Microsoft, 3M and IBM), and as part of a PhD at UQ Business School, title 'A consumer value theory of innovation: a grounded theory approach'.